THE FINANCIAL PAGE
GR.OUPON CLIPPING
T he history of the Internet is, in part,
a series of opportunities missed:
the major record labels let Apple take
over the digital-music business; Block-
buster refused to buy Netflix for a mere
fifty million dollars; Excite turned down
the chance to acquire Google for less
than a million dollars. Time and again,
businesses with seemingly dicey pros-
pects have ended up becoming huge
successes, and price tags that once
seemed absurd have turned out to be bar-
gains. But big companies have learned
their lesson: these days, they're posi-
tively obsessed with not missing the
next big thing, and are willing to shell
out huge sums of money in order to in-
sure that they don't. And when Google
tried recently to acquire the two-year-
old daily-deal site Groupon, for the
seemingly outlandish sum of six bil-
lion dollars, it was hard not to wonder
if the lessons of history had been learned
too well.
To be sure, Groupon's got a healthy
business. Almost forty million people,
in more than a hundred and fifty cities
around the world, have signed up for its
e-mails, and every weekday it sends sub-
scribers a daily deal, typically from a
local business-fifty per cent off spa
treatments, say, or twenty bucks off
sushi. Groupon's gimmick, such as it is,
is that you get the deal only if enough
people sign up for it, but at this point
the site is so popular that just about all
the deals go through. In essence, what
Groupon offers is an innovative twist on
the tradition of loss-leader marketing:
just as retailers have always used steep
discounts on certain items in order to
get people into their stores, Groupon's
deals are an easy, low-risk way for small
businesses to attract new customers. It's
an appealing business model, particu-
larly in recessionary times. But is it, as
Groupon's C.E.O., Andrew Mason,
suggested recently, a company that's
going to transform the way local busi-
ness works? Or is it just another over-
priced flash in the pan?
The answer, most probably, is nei-
ther. Groupon isn't going away. Un-
like many Web companies, it's been
profitable from the start. (It takes fifty
per cent of the revenue in every deal.)
This year, it had half a billion dollars in
sales, and estimates are that, before long,
it could have as much as two billion dol-
lars in revenue. The market for local
advertising, which is really the business
Groupon is in, is huge (more than $130
billion a year) and still relatively un-
tapped online. And, while Groupon has
many competitors, it's by far the big-
gest and most respected player around.
So Groupon is a real company. But
it seems unlikely that it's going to be-
come a revolutionary company, along
the lines ofY ouTube, Facebook, Twit-
ter, and Google. Most of the companies
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that have transformed the Web have
certain things in common. They have
distinctive technologies. They benefit
from what are usually called network
effects: the more people who use the
service, the more valuable the service
becomes. (You're more likely to use
Facebook or Twitter when lots of your
friends have signed up, and the more
people there are who use Google the
more accurate its searches become.)
Most important, they scale easily, mean-
ing that they can grow very big without
much additional effort. To be sure, the
more users Twitter and F acebook have,
the more servers they have to buy, and
so on. But the genius of these compa-
nies is that their users do most of the
work and create most of the value; once
46 THE NEW YORKER, DECEMBER 20 & 27, 2010
the ball is rolling, it's the users who keep
pushing it along.
Groupon, by contrast, is a much more
old-school business. It doesn't have any
obvious technological advantage. Its
users don't really do anything other than
hit the "buy" button. And its business re-
quires lots of hands-on attention: thou-
sands of salespeople to sell to and ser-
vice local businesses, copywriters to
come up with the right pitches for cus-
tomers (Groupon' s clever ad copy is one
of its selling points). Groupon isn't just
flinging piles of deals at users; the idea
is that it's performing a "curatorial" role,
and is relying on humans, instead of on
Google-style algorithms. All these things
are real assets-and a reason that Grou-
pon is less vulnerable to competition than
people think-but they're also very labor-
intensive. Facebook, with five hundred
million users, has fewer than two thou-
sand employees, while Groupon, with
some forty million subscribers, already
has three thousand employees. Groupon
can obviously add subscribers easily (all
it has to do is send out more e-mails),
but serving them enough deals to keep
them happy is another matter: the more
business it does, the more people it has to
hire. Recently, Groupon has experi-
mented with a self-service system, which
would let it outsource some of the work
to local merchants, who could set up vir-
tual storefronts. But, unless it wants to
abandon the approach that made it suc-
cessful, scaling up will require more
work and more workers than the Twit-
ters and You Tubes of the world need.
This isn't an impossible task; Amawn
succeeded in the face of similar obstacles.
But, even if Groupon doesn't end up
changing the way we shop, there's still a
good chance that it will make a lot of
money-maybe even more than some of
its revolutionary brethren. When we
think about the Internet, we often think
of businesses in black-and-white terms:
either they're huge, world-changing hits
or they're flops. But that's a false dichot-
omy. These days, the Web is fi.ùl of good,
solid businesses that may not be remak-
ing the world but that are helping give
people what they want. If that's what
Groupon ends up being, well, there are
worse fates.
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-James Surowiecki